Ukrainian Yields Jump to Pre-Bailout Level on Civil-War Threat

Jan. 24 (Bloomberg) -- Ukrainian bond yields jumped to a
level last seen before the nation won a $15 billion bailout last
month from Russia as the European Union warned that anti-government protests could escalate into a civil war.

The yield on dollar debt due in April 2023 rose 18 basis
points, or 0.18 percentage point, to 9.55 percent by 6:55 p.m.
in Kiev, the highest since Dec. 16, a day before Ukraine secured
the rescue loan. It is up 123 basis points this week, the most
on record for the period, data compiled by Bloomberg show.

EU justice chief Viviane Reding told CNBC today Ukraine
must get its “house in order” as it heads in the “direction
of a civil war.” President Viktor Yanukovych is struggling to
end two months of demonstrations after he snubbed a cooperation
deal with the EU on Nov. 21 to win financial aid from Russia.

“The confrontation can create unpredictable and largely
negative consequences for the country’s economy and political
integrity,” Bank of America Corp. analysts Arko Sen in London
and Vladimir Osakovskiy in Moscow wrote in a report today. The
“president’s readiness for concessions could endanger the
continuity of the Russian bailout,” they said.

Activists yesterday took over local government headquarters
in several cities as clashes this week left as many as five
people dead and about 1,250 injured after the enactment of laws
giving the police special powers to quell the protests.

The Bank of America analysts are “turning more cautious”
toward Ukraine and they now prefer sovereign notes maturing in
2014 and 2016 over those due in 2020 and 2022, the report says.

Default Swaps

The yield on the government’s June 2014 dollar notes rose
176 basis points to 11.80 percent, taking this week’s jump to a
record 6.22 percentage points. The cost of insuring Ukrainian
debt with credit-default swaps rose 17 basis points to 912, up
for a sixth day to the highest since Dec. 16, according to CMA.

While opposition leader Vitali Klitschko said the president
still refuses to call early elections, lawmakers were yesterday
recalled from their winter break for an emergency session on
Jan. 28. Parliament will consider a no-confidence motion against
the government and the repeal of laws curbing rallies, Svoboda
party head Oleh Tyahnybok said.

The U.S. has pledged to revoke the visas of persons linked
to violence last year. White House press secretary Jay Carney
said yesterday that sanctions remain under consideration.

Ukraine, a key east-west energy transit nation, is still
grappling with a record current-account deficit and a third
recession since 2008. The hryvnia was little changed at 8.4350
per dollar, leaving it 3.1 percent weaker in the past month.

Russia bought $3 billion in two-year Ukrainian bonds on
Dec. 20 and pledged another $12 billion this year, as well as
cutting the price of natural-gas supplies to Ukraine.

“There is clear concern as to whether the loans will
continue to be disbursed and what conditions are going to be
attached to the disbursements by Russia,” Simon Quijano-Evans,
London-based head of emerging-market research at Commerzbank AG,
said by e-mail today.